Point of View: The Snoozeth-Looseth Doctrine

When a mortgage loan is purchased, an assignment of the mortgage and the underlying note generally must be executed and filed for record in the public records. This requirement is intended to provide others with the ability to know to whom notice is required to be given in the event of a foreclosure in a judicial foreclosure state like Ohio, or whom to contact to request a payoff figure.

In today's environment of frequent purchases and sales of larger and larger pools of loans, mortgage servicers are confronted with logistical and practical difficulties in ensuring that assignments are filed for record properly and timely. In Ohio, failure to do so can result in being unprotected in a foreclosure filed by another creditor.

The Doctrine

On Feb. 10, 2006, the Court of Appeals for Hamilton County (Cincinnati), Ohio, issued a decision causing a creditor to be unprotected under these exact circumstances. A second mortgage had been sold multiple times, but there was no recorded chain of assignments showing ownership of the loan in the final purchaser. Therefore, when the first mortgagee filed a foreclosure on its mortgage, it properly named and served a summons on the original owner of the second mortgage, rather than naming and serving a summons on the hidden current owner of the second mortgage.

When the named seller of the second mortgage failed to respond, a default judgment was entered against it. Two months later, after learning of the foreclosure, the true owner of the second mortgage filed a motion for leave to file an answer, claiming in an affidavit that the seller "inexplicably" failed to record the assignment despite having agreed to do so. The Trial Court originally granted the motion, but then rescinded its order, leaving the second mortgage unprotected in the case. Therefore, the property was ordered to be sold free and clear of the second mortgage, and the owner of the second mortgage was not entitled to any of the proceeds of the sale.

The owner of the second mortgage filed an appeal to the Court of Appeals, arguing that there had been "excusable neglect." However, the Court of Appeals held that because there was no explanation for the failure to have an assignment recorded, the neglect was not excusable. Therefore, the Court of Appeals affirmed the Trial Court's decision, stating the following: "Applying the age-old legal maxim snoozeth-looseth, we affirm." Fifth Third Bank v. NCS Mtg. Lending Co., 2006-Ohio-571.

Other Trouble

Once a loan is sold, the seller might enter a zero balance on its system or might delete the loan from its system completely. Too often, upon being contacted for a payoff figure or other inquiry, a staff member for the seller might mistakenly believe that the loan was paid off rather than sold, and might report to a title company handling a closing that there was no money due on the mortgage. If the assignment was not recorded prior to a title company completing a closing in reliance on the erroneous information, litigation may ensue and the buyer of the loan might be compelled to release the mortgage. Moreover, if the assignment is not recorded and the seller erroneously files a release of the mortgage, a lawsuit and a court order might be required to reinstate the mortgage. The buyer of the loan may be at risk of losing its mortgage in the event of a transfer of title, or losing its lien priority in the event of the recording of a lien by another creditor in the interim.

Who's Responsibility?

In the NCS case, the purchaser argued that it was entitled to relief from the default judgment because the seller of the loan had agreed to record the assignment, and inexplicably failed to do so. However, the Court, citing precedents, stated: "If the assignee does not provide the proper notice by recording the assignment and thus is not named as a party, he is bound by the decree of foreclosure to the same extent as the named party assignor."

The lesson is clear. Buyers of loans bear the responsibility to protect their own interests by ensuring that an assignment of the mortgage is promptly filed for record. In addition, in order to ensure a clear chain of title, any defective or missing prior assignments of the mortgage must be rectified. Otherwise, the risk of loss remains.